Interim
Joint Committee on Appropriations and Revenue

Minutes
of the<MeetNo1>1st Meeting

of
the 2010 Interim

<MeetMDY1>July 22, 2010

Call to Order and Roll Call

The<MeetNo2>1st meeting of the Interim Joint
Committee on Appropriations and Revenue was held on<Day>Thursday,<MeetMDY2>July
22, 2010, at<MeetTime>1:00 PM, in<Room>Room 154 of the Capitol Annex. Representative
Rick Rand, Chair, called the meeting to order, and the secretary called the
roll.

The agenda consisted of a summary of revenues and
expenditures for the General Fund and Road fund for FY 10, necessary
governmental expenses, and an update on state debt restructuring provided by
Ms. Mary Lassiter, Secretary of the Governor's Executive Cabinet and State
Budget Director.

General Fund FY 10 year end
update

Secretary Lassiter reported that the General Fund declined
2.4% in FY 10, or $201.2 million. This decline represents the first time
receipts have declined in two consecutive years since 1945. She provided
historical data regarding revenue increases and decreases over the past decade,
and average percentage General Fund growth by decade from 1945 to the present.

Secretary Lassiter stated that although revenues were down for
FY 10, actual receipts increased by $27 million as compared to the official
Consensus Forecast Group (CFG) estimate. The CFG estimate for FY 10 was $8,197
million and the actual revenues received for FY 10 were $8,225 million. The CFG
estimates for FY 11 are $8,570 million and $8,871 for FY 12. The General Fund is
not expected to recover to FY 08 levels until the close of FY 12.

Secretary Lassiter discussed the General Fund FY 10 yearend
balance. The General Fund closed FY 10 with a surplus of $29.7 million. The
surplus resulted from revenues in excess of enacted estimates, fund transfers
in excess of those budgeted and various lapses. An overview was provided of the
FY 10 shortfalls, and Secretary Lassiter stated that any surplus will be
applied to necessary government expenses (NGE) and to replenish the Budget
Reserve Trust Fund, which currently has a $0 balance.

Necessary Government Expenses

Secretary Lassiter discussed necessary government expenses
(NGE), explaining that the executive branch has the authority to spend funds
for certain expenses as provided in the budget, but that no actual funds have
been appropriated for these purposes. Funds to cover NGE come from the General
Fund Surplus Account, the Budget Reserve Trust Fund, or if these sources are
insufficient, other cuts must be made to accommodate the expenses. Total NGE
for FY 10 was $38.9 million, with $25.3 million of that amount within Military
Affairs to cover expenses related to the ice storm and other disasters and
emergencies. She then provided further details regarding the NGE relating to
natural disasters in the state. Secretary Lassiter also provided a detailed
accounting of authorized NGE for FY 10 – 12, which include funds for debt
service for a 4th State Veteran’s nursing home, disaster match
money, judgments, forest fire suppression, emergency repairs, and various other
necessary state expenses. The unbudgeted lapses for FY 10 total $15.2 million.

Road Fund FY 10 year end update

Secretary Lassiter provided an update regarding the FY 10
Road Fund. The year end revenues were $1,206.6 million, which was an increase
of 1.2% from FY 09. This was $7.5 million more than the CFG estimate of
$1,199.1 million. The Road Fund is expected to return to FY 08 levels by FY 11.
The ending balance for FY 10 resulted in a surplus of $41.9. These funds will
be deposited into the State Construction Account in accordance with the HB 1
Road Fund Surplus Expenditure Plan.

General Fund and Road Fund debt
restructuring

Secretary Lassiter discussed debt restructuring, stating
that restructuring outstanding liabilities will realize debt service savings
over the biennium. The principal only is amortized over the remaining life of
the existing debt to gain upfront savings which can be used to keep from
cutting priority expenditures. Secretary Lassiter noted that unfortunately,
this strategy does increase costs in the long term and can be viewed negatively
by debt rating agencies. Restructuring efforts will realize savings to the
General Fund of $162.8 million in FY 10, $139.8million in FY 11, and
approximately $130.0 million in FY 12. The Road Fund will realize savings of
$81.4 million in FY 10, $52.0 million in FY 11, and $53.0 million in FY 12.

In response to a question from Representative Pasley,
Secretary Lassiter stated that all savings gained from planned furloughs of
Transportation Cabinet employees will remain within the Road Fund.

Secretary Lassiter replied to questions from Senator Boswell
by saying that it is difficult to compare Kentucky’s economic status to other
states because of differing government structures. Economic difficulties are
being felt throughout the United States. As of yet, Kentucky has not had to
make deep cuts to education or lay off large numbers of state employees, so
Kentucky is relatively better off than many other states. She also noted that bond
rating agencies will likely look negatively upon the state having a $0 balance
in the Budget Reserve Trust Fund which could affect our bond rating, but
currently the state bond rating is solid.

In response to a question from Representative Thompson,
Secretary Lassiter stated that it is difficult to predict if or when the state
will receive additional FMAP monies from the federal government. The impact of
not receiving the expected $238 million would be severe.

In response to a question from Representative Adams,
Secretary Lassiter noted that all NGE are reported by communication to the A
& R committee but the expenditures do not go through the Contract Review
committee process because most, in not all NGE are not done by contract.

In response to questions from Senator Shaughnessy, Secretary
Lassiter replied that about $900,000 has been appropriated for security at the
World Equestrian Games. These funds have been directly appropriated and will
not count as NGE. She said that most state agencies have experienced cuts
through budget reductions and have implemented efficiencies to the extent
possible without dramatically affecting services.

Secretary Lassiter replied to questions by Chairman Rand
stating that the total budget reduction for implemented efficiency measures has
been $131 million and the executive branch is still actively trying to identify
areas where additional efficiencies can be implemented. Mr. Harkenrider
addressed a question regarding the gasoline tax stating that the total fuel
rate has increased to 25.9 cents per gallon, but the increase will not show up
until the August receipts. Secretary Lassiter then gave a brief overview of the
economic indicators which her office will watch over the next biennium.